Created by the merger and nationalization of 245 Indian and foreign insurers and provident societies in 1956, LIC has been a household name in India for decades now. Here are key things you should know about the impending IPO!
How Big Is LIC?
LIC is India’s biggest life insurer with 286 million policies, 115,000 employees, 1.34 million individual agents and more than 2000 branches.
It has a 64.1% market share in terms of premium and a 66.2% market share in terms of new business premium.
It manages $528 billion of assets, more than the total size of India’s mutual fund industry and 3.3 times more than the total Assets Under Management of all 23 private life insurance companies.
At about $130 billion, LIC’s investments in listed equity represents around 4% of the total market capitalization of NSE.
The government, which owns 100% of LIC, is selling 316 million shares, representing 5% of its equity stake through the IPO. The issue is a 100% offer-for-sale, meaning LIC will not receive any proceeds from it.
10% of the IPO size reserved for policyholders, while employee quota has been capped at 5%.
LIC’s dominance is unparalleled globally with no other life insurance player in any country enjoying such high market share.LIC is ranked fifth globally in terms of life insurance premium and tenth in terms of total assets. It is the only Indian player among the top global insurers.
The draft prospectus has put LIC’s embedded value at $71.3 billion. The embedded value is a measure of future cash flows in life insurance companies and a key financial metric for insurers.
SBI Life Insurance, HDFC Life Insurance and ICICI Prudential Life Insurance are the only listed life insurers in India. HDFC Life has a market cap of $15.6 billion, four times its embedded value while SBI Life and ICICI Prudential Life have a market cap to embedded value ratio of 3.3 times and 2.4 times respectively.
If LIC is valued at 4 times its embedded value, its market cap could be $285 billion, making it India’s most valuable company. A 5% stake at that valuation will fetch the government $14.25 billion
If ICICI Prudential Life’s multiple is taken, LIC could be valued at $171 .1 billion.
That would make it India’s third biggest company by market capitalisation and fetch the government nearly $8.6 billion in the IPO.
LIC reported profit after tax of $199 million for the first six months of FY22. It collected premiums worth $24.6 billion during this period. Its gross and net non-performing asset ratios in the debt portfolio stand at 6.57% and 0.05%, respectively.
LIC faces significant competition from private players. As a result it has been losing market share although it continues to be the largest life insurer.
The gross written premiums for LIC increased by 6.30% in FY21, compared with 24% for SBI Life and 18% for HDFC Life. With the government raising the FDI limit in the insurance sector to 74% from 49% last year, there is an impending threat of foreign players entering the market and capturing market share.
LIC’s policies are primarily distributed through agents. In FY21, individual agents were responsible for 93.8% of new business premium compared to less than 30% for private peers.
LIC said it may be required to take certain actions to facilitate the government’s economic or policy objectives and there can be no assurance that such actions would necessarily be beneficial to the company.
LIC is involved in approximately 26,919 criminal, consumer, civil proceedings, tax proceedings and actions taken by statutory or regulatory authorities.
LIC IPO - The Impact On Markets, Investors And Other Investor Stocks
The success of the LIC IPO would be dependent upon the performance of the capital market. The Indian equity market touched new heights in 2021, and was the top performer among global peers due to favourable macroeconomic conditions, strong corporate earnings, and inflows from retail investors.According to an HSBC report, FII flows will go back to China from India in 2022, compared to 2021 when money flowed from China to India. On February 14, the stock market witnessed its biggest single-day fall in the last 10 months. The equity market crashed 3 per cent amid the escalating tension between Russia and Ukraine, which has put oil prices on the boil. And, the markets have been choppy ever since.
UBS Securities expects the listing of LIC to have positive externalities for the life insurance industry as it might lead to a higher awareness that will benefit private companies as well. That said, the brokerage firm does not expect LIC to improve the share of protection products in its product mix anytime soon given its ethos on being a savings instrument for Indians.
Ventura Securities in its note said: “You see, Covid-19 was a stress test for Indian life insurance companies. Given their steady performance even during such a tricky phase, they are likely to be on a firm growth path going forward. And LIC being the market leader stands the best chance to capture the future growth opportunities."
Big issues often squeeze liquidity for a moment and impact equity flow for a short period, which jitters the sentiments for secondary markets too. The mega issues affect liquidity in secondary markets as investors rotate the funds from the secondary to the primary market.
The appetite for LIC IPO will be high from common & new investors given its mammoth public brand value. However, in the long-term, the end demand and performance will depend on its future growth, profitability, and sustenance of market share in the life insurance industry.